The urge to merge

Like all major industries, the telecoms business has had its share of failed partnerships, which may have looked compelling on paper, but ended up huge disappointments in reality. Fresh examples are readily available. And where mergers don't fail completely, there is still the risk that they will fail to create the value expected, and underperform.

|~||~||~|In the same week that Nokia detailed the bold plan to merge its network business with the carrier-related operations of Siemens, the Finnish equipment vendor also announced it would not be forming the new CDMA device company with SANYO it preliminarily announced on February 14, 2006. It explained the calling off of its plans with SANYO in terms of the two companies having concluded that it is more beneficial to pursue other options individually for their CDMA handset business rather than together. In the current climate of consolidation within the vendor telecoms space, Nokia and SANYO's option to walk away from their proposed CDMA tie-up is a timely development to highlight that not all mergers have merit. The financial community has generally reacted positively to the news of the proposed tie-up between Nokia and Siemens — concluding that it makes a lot of sense from both a strategic perspective as well as a size and scale aspect. Nokia's infrastructure business has historically failed to match the massive brand success enjoyed by its mobile handset unit — which has been built up in the main, by the vision of Nokia veteran and former CEO Jorma Ollila. His departure at the end of May after more than 13 years at the helm of Nokia, was always likely to signal changes at the Finnish vendor, though I am sure few predicted it would be so soon after his departure. Siemens' telecoms unit — both fixed and mobile, have been the subject of gloomy outlooks for some time now, and resulted in the German conglomerate unloading its handset unit to Taiwan's BenQ last year. A tie-up with Nokia offers Siemens a partner with a proven track record of efficiency and a large degree of market knowledge, which would compliment Siemens' existing carrier-related business, and assist in the penetration of new markets. The proof of the pudding will indeed be in the eating. Like all major industries, the telecoms business has had its share of failed partnerships, which may have looked compelling on paper, but ended up huge disappointments in reality. Fresh examples are readily available. Struggling Canadian vendor Nortel Networks last month announced that a joint venture proposal with Chinese infrastructure vendor Huawei Technologies had been scrapped, just four months after the initial plan was first publicised. Some tie-ups have not quite yet failed, but have been far less dynamic and effective than initially expected. Last February, LG also penned a deal with Nortel, under which the two companies agreed to enter a joint venture aimed at establishing a telecoms company with a core competence in 3G technology. Nothing much has been heard of the joint venture since, though there was some light on the horizon, with LG-Nortel having last month announced the signing of an MoU for broad range collaboration in VoIP with Microsoft. The proposed acquisition of Lucent by Alcatel in April, was also positively received by analysts around the world, offering Alcatel access to markets in North America where Lucent is strong. The combined company will have an aggregate market capitalisation of approximately US$36 billion and the integration of Lucent into Alcatel, given the two company's cultural and geographic differences will be crucial to the long-term success of the deal. Ericsson, the company that the Nokia and Siemens combination is looking to dislodge as the world's leading telecoms infrastructure company, is not averse to a little M&A activity of its own. However, having experienced a crisis at the end of the 1990s that quite literally threatened the continued existence of the company, Ericsson's newfound efficiency and market leadership are elements it does not want to see diluted too much by large acquisitions. Happy to make opportunistic purchases of companies that fill gaps in its product portfolio, as it did through the acquisition of certain businesses from Marconi UK last October, Ericsson will still no doubt be keeping a very close watch for the alliances being formed all around it. ||**||